Analysis & Opinion

WASHINGTON (Reuters) - A senior Internal Revenue Service official knew in 2011 that IRS agents were giving extra scrutiny to conservative Tea Party groups, according to documents from a watchdog office obtained by Reuters on Saturday.

In a scandal that has already embarrassed the IRS and become a distraction for the Obama administration, a report from the Treasury Department's Inspector General For Tax Administration (TIGTA) was expected to be issued publicly next week on the IRS practice, who knew about it and when.

As more information emerged over the weekend, the White House said President Barack Obama was concerned about the conduct of a few IRS employees.

White House spokesman Jay Carney said: "If the inspector general finds that there were any rules broken or that conduct of government officials did not meet the standards required of them, the president expects that swift and appropriate steps will be taken to address any misconduct."

The TIGTA report finds that Lois Lerner, who heads the IRS's tax-exempt groups unit, knew of the extra scrutiny as early as June 2011.

On Friday, in remarks that triggered a storm of controversy, Lerner publicly apologized at a legal conference in Washington for what she termed "inappropriate" targeting by the IRS of conservative groups applying for tax-exempt status.

She said the practice was confined to an IRS office in Cincinnati and that it was "absolutely not" influenced by the Obama administration. She said none of the targeted groups was denied tax-free status.

The TIGTA report was requested last year by Republican Representative Darrell Issa, chairman of a congressional investigative panel, after he accused the IRS of targeting conservative groups.

TIGTA has found that the IRS singled out groups with the words "Tea Party" or "patriot" in their names for closer scrutiny, according to a TIGTA document.

IRS CHIEF DENIED KNOWLEDGE

In March 2012 in congressional testimony, then-IRS Commissioner Doug Shulman said the IRS was not making it harder for conservative groups to become tax-exempt.

Shulman stepped down at the end of 2012 when his term ended. Steven Miller was named acting head of the agency.

The IRS said in a statement on Saturday that the TIGTA report was correct. The statement said officials in the IRS exempt organizations division knew of the screening and that "IRS senior leadership did not have this level of detail."

The statement said that while "mistakes were made," there "were not partisan reasons behind this."

Although part of the executive branch, the IRS is considered an independent agency and officials try to stay out of politics.

According to the TIGTA document, the IRS was singling out the conservative groups as early as March 2010.

The document says managers in the "determinations unit" told specialists to be on the lookout for applications from organizations linked to the Tea Party, a political movement that favors smaller government and fewer and lower taxes.

CHANGING CRITERIA

The IRS screening criteria were broadened in July 2011 to cover "organizations involved with political, lobbying or advocacy" seeking tax exemption, according to a TIGTA timeline of events.

Further broadening of the criteria occurred in January 2012 and again in May 2012, the document said.

Issa has vowed to investigate the matter and the House committee he chairs has the power to issue subpoenas. At least one other congressional panel intends to hold hearings, giving Republicans multiple opportunities to hammer the agency and the White House over the affair that had been brewing for months.

Lerner said IRS agents in Cincinnati targeted conservative groups "without talking to managers." The staffers were trying to deal with a crush of applications for tax-exempt status by using key words to get through the paperwork faster, she said.

About 300 applications were initially flagged for closer scrutiny. Of those, 75 were chosen for that treatment based on the presence of the key words in their names.

THOUSANDS OF APPLICATIONS

Each year the IRS reviews as many as 60,000 tax-exempt applications from groups ranging from charities to labor unions. Some are classified as 501(c)(4) groups after the section of the tax code that makes them tax-exempt. Such organizations can collect money from anonymous donors and spend it on advertising.

To get and keep their tax-exempt status, 501(c)(4) groups cannot endorse a political candidate or a political party.

The number of groups seeking 501(c)(4) status more than doubled from 2010 to 2012, coinciding in part with the surge of Tea Party enthusiasm. In 2010 the U.S. Supreme Court issued its "Citizens United" decision lifting government limits on corporate spending in federal elections.

Consumer groups have been pushing the IRS to clarify the standards for "social welfare organizations," as they are known in Section 501(c)(4) of the tax code, to ensure that they are not abusing their tax-exempt status.